2012 (9) TMI 608 - AT - Income Tax

Relinquishment of tenancy rights - Income from other sources or Capital gains - non-allowance of relief u/s 54EC - assessee, partner in a firm called George Nainan & Co., surrendered his tenancy right on the property to the other partner of the firm - owners of the property had originally let out the property in to Mr. T who surrendered his tenancy rights on 10.10.82 and the landlord had entered into an agreement with George John and Shri Sunny Nainon on 3.10.1982 for the tenancy - Though the occupation of the premises was spilt between the partners namely Shri George John and Shri Sunny Nainon, the tenant of the property was in fact the firm and not the individual partners - Revenue contended that assessee was not the tenant and, therefore, there arises no question of relinquishment of tenancy right to other partner Held that - Though in the lease deed, the lessee is Shri George Nainon and Co., it is in fact the partners who are occupying the premises individually. It is also not in dispute that even after 1982, the property was not occupied jointly and severally but was occupied individually and separately. Thus, the advantage of common occupation and enjoyment is absent. It is also worth noting that it was not necessary to mention that the tenancy right over the property could not be separated without mutual consent had it been the right of the firm. Thus the intention of the parties to hold the right of tenancy over the respective portion of the property was clear from the clauses of the lease deed itself. Thus in line with the said clause, when the assessee relinquished his right, it has resulted in capital receipt and thus the assessee has rightly claimed it to be a capital receipt and is also eligible for deduction u/s 54EC of the Act for the amount invested in NABARD capital gains Bonds - Decided in favor of assessee

Summary

Issues:
1. Treatment of Rs. 8 lakhs received on relinquishment of tenancy rights as 'income from other sources' instead of 'capital gains'.
2. Disallowance of relief u/s 54EC of the Income-tax Act.

Analysis:
1. The case involved a dispute over the treatment of Rs. 8 lakhs received by the assessee on relinquishment of tenancy rights. The Assessing Officer (AO) treated this amount as 'income from other sources' instead of 'capital gains' as offered by the assessee. The AO based this decision on the grounds that the assessee was not the tenant and therefore, there was no actual relinquishment of tenancy rights. Consequently, the AO denied the benefit u/s 54EC of the Act. The CIT(A) upheld the AO's order, leading the assessee to file an appeal before the ITAT, Bangalore.

2. During the proceedings, the assessee contended that the partnership firm formed for holding the tenancy right existed only on paper and was not intended for business operations. The assessee argued that the individual partners exercised their tenancy rights separately, and the amount received for relinquishment should be treated as a capital receipt. The assessee also claimed that the amount should be considered as accruing in the year of entering into the agreement, not in the year of receipt. Additionally, the assessee sought exemption u/s 54EC for the amount invested in NABARD bonds.

3. The ITAT analyzed the facts and concluded that the assessee did possess a right of tenancy over the property in Mumbai. The tribunal noted that the essence of the contract, not the nomenclature, determined the nature of the transaction. Despite the lease deed mentioning the firm as the lessee, it was the individual partners who occupied the premises separately. The tribunal observed that the intention of the parties to hold tenancy rights individually was evident from the clauses of the lease deed. Therefore, when the assessee relinquished the right, it resulted in a capital receipt. As a result, the ITAT allowed the appeal filed by the assessee, overturning the lower authorities' decision.

4. The ITAT's decision emphasized the importance of analyzing the substance of transactions rather than relying solely on formal documentation. By recognizing the individual partners' rights and intentions, the tribunal determined that the amount received on relinquishment of tenancy rights should indeed be treated as a capital receipt, entitling the assessee to the claimed deduction under section 54EC of the Income-tax Act.